There is an answer to the Euro crisisby George Soros / July 18, 2012 / Leave a comment
Published in August 2012 issue of Prospect Magazine
It is now clear that the main cause of the euro crisis is that the member states surrendered their rights to print money to the European Central Bank when the single currency was created by the Maastricht Treaty in 1992. They did not realise what that entails; neither did the European authorities.
When the euro was introduced European regulators allowed banks to buy unlimited amounts of government bonds—the sovereign debt of each country—without setting aside any equity capital to protect them against the risk of default. The European Central Bank discounted all government bonds on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker countries to earn a few extra basis points. That is what caused interest rates to converge, which in turn caused the competitiveness of the eurozone countries to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries, such as Spain and Ireland, enjoyed housing and consumption booms on the back of cheap credit, making them less competitive.